What's going on in FinTech?

Or maybe more aptly - "What are private Tech company CEOs, CFOs and their Boards talking about at the moment?"

I attended the Goldman Sachs EMEA Fintech Conference earlier this week which had an impeccable line-up of founders from the next crop of European Fintech IPO candidates (whenever that window might open up again).

Some take aways at the individual company operating level...

1) Growth versus Profit

With the benign interest rate environment now behind us, any business blindly chasing top line growth at all costs is out of vogue and probably in trouble. The allure of growth for growths sake is gone and the easy money is gone with it. Investment committees, credit committees, LPs and the backers of the backers want to know a lot more on where capital is being allocated. That means more due diligence and more deliberation on the investments being underwritten. Of course, this also means capital is being deployed at a much slower pace (with some managers sitting on their hands to quell indigestion from the bull run). Elaborate tales of attractive "unit economics" will only get you so far. Investors want to understand how gross margin converts to EBITDA converts to cashflow. Good old fashioned corporate finance principles are back in vogue for now i.e. revenue = vanity, profit = sanity, cash = reality.

The allure of growth for growth's sake is gone. The easy money is gone with it.

2) Valuations

The dour sentiment in public markets and the dreary exit conditions make it tougher to justify big valuations in later stage private company tech holdings. Anecdotally, many private investor portfolio managers are also focusing their attention on buying opportunities in public markets at the expense of private markets. Therefore, the overriding sentiment in the private market is more bearish: expect more valuation resets, down-rounds and a re-rating of company valuations. While this is a painful adjustment, it is probably a very necessary one.

Expect more valuation resets, down-rounds and are-rating of company valuations.

At an industry level, Fintech is maturing and evolving nicely with plenty of room for growth...

Whilst things might tightening at a company level, it's hard not to be long at a sector level...

1) Product Expansion & (Re)Bundling

If Fintech 1.0 was about unbundling the banks with apps for Fx, lending and current accounts then it feels like Fintech 2.0 is going to be about some sort of re-bundling! A number of payments companies are knee-deep in launching lending solutions for their customers (e.g. the impressive, under the radar Moneycorp and the younger Mollie). Payments visibility is a great pre-cursor to smart lending and this could be lucrative for the smart ones e.g. the UK has a TAM of £500bn in loan stock. However, most new lenders have not been through a credit cycle before and that is surely going to be tested in the next couple of years. Pursuing other adjacencies makes a lot of sense too (e.g. Mollie launching EPOS) and I thought Marc-Alexander Christ from SumUp framed his company's ambition very well as the 'Global small business SuperApp' - and with 4m+ merchants in 35 markets it's hard to poke holes in this strategy.

2) Incumbent Banks will Fight Hard

The maturity of enterprise software coming to the market targeting banks allows for greater use of off-the-shelf products by incumbents. Antony Jenkins CBE spoke convincingly about how 10X Future Technologies was set-up to help banks become more digitally agile and who would know this problem statement better from his time leading Barclays. In the last 10 years, banks have been hemmed in by three forces: FinTech, BigTech and LegacyTech. 10X believe they can make the incumbents 10 times better than fintechs on cost income ratios in the 30% range. Most bank CEOs would be very content to live in that elusive range.

However, the technological gap of legacy players will take time to narrow. Many banks are no longer distracted from the past, are well-capitalised and extremely profitable. That means M&A is a readily available tool to plug product, people and technology capability gaps in the coming years and that will surely drive a steady flow of banks acquiring Fintechs in my opinion.

M&A is a readily available tool to plug product, people and technology capability gaps

3) Digital Assets - Do Not Ignore

The mere fact that every agenda now has a serious section carved out for digital assets, decentralised finance (DeFi) and all forms of Web 3.0 is a sign that whilst still noisy, it's gathering interest from a disparate audience including policy makers, mainstream banks investors and corporates.

The debates are now less focused on whether blockchain and these technologies actually work but more on how they can achieve greater adoption and scale.

DeFi is an experimental and unregulated alternative financial system, grounded in blockchain technology and includes many of the same products and services found in the traditional financial system—including credit and lending but with no centralised intermediaries. It has the potential to disrupt all of the existing market structures. The debates are now less focused on whether blockchain and these technologies actually work but more on how they can achieve greater adoption and scale.

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